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Pan American Debt Outperforms on Cnooc Deal: Argentina Credit

Bonds of Pan American Energy LLC, Argentina’s biggest oil exporter, are beating debt issued by Latin American peers on speculation the company will bolster production after China’s Cnooc Ltd. takes control.

Pan American’s 7.875 percent bonds due in 2021 returned 11 percent since their May sale, compared with 3.8 percent for Credit Suisse Group AG’s Latin American energy index. Debt with similar maturity issued by Rio de Janeiro-based Petroleo Brasileiro SA and Petroleos Mexicanos of Mexico City returned 5.4 percent and 6.6 percent, respectively.

Barclays Plc says Pan American’s yields relative to U.S. swap rates will narrow as much as 30 basis points from 377 basis points as Cnooc completes the acquisition. State-controlled China National Offshore Oil Corp. and its unit Cnooc have spent more than $4 billion this year on oil and gas assets in Argentina and North America to meet demand from China, the world’s fastest-growing major economy. Cnooc and Argentina’s Bulgheroni family agreed on Nov. 28 to buy the 60 percent of Pan American they didn’t already own.

“Pan American is a great asset, it never defaulted during the crisis and I think it will continue to be a very good operation,” Ruth Mazzoni, a corporate bond analyst at Standard Bank in New York, said in a telephone interview. “The greatest benefit to Pan American is that its access to financing is going to be greatly enhanced.”

Pan American is rated Ba1 by Moody’s Investors Service, one level below investment grade. Pemex and Petrobras are rated Baa1, the third-lowest investment grade. Cnooc is rated Aa3, seven levels above Pan American.

Narrowing Spread

The average yield of Argentine government bonds is 9.1 percent, or 210 points above debt for Buenos Aires-based Pan American.

The yield on Pan American debt relative to U.S. Treasuries will narrow as much as 90 basis points in “the near term,” said Mazzoni, without being more specific. A basis point is 0.01 percentage point. Juan Cruz, a corporate bond analyst with Barclays in New York, said in a report dated Dec. 7 that yields will further compress relative to U.S. swaps.

Bridas Corp., the oil company owned by Cnooc and the Bulgheroni family, will pay BP Plc $7.06 billion for Pan American. The transaction may be completed by the first half of 2011 and allows the Beijing-based company to expand oil resources as demand surges in China.

Pan American, the second-largest Argentine oil producer behind Repsol-YPF SA, controls about 18 percent of the market, produced 993 million barrels of oil in 2009 and has interests in 11 production and 13 exploration blocks in Argentina, Bolivia and Chile, according to its website.

Pan American’s yields have fallen 30 basis points to 7.01 percent since Sept. 22, when Citigroup Inc. issued a report saying Cnooc was interested in purchasing the company.

‘New Partner’

With Cnooc, Pan American gains a “new partner with fresh capital and solid financials” in contrast to London-based BP, said Lucas Lainez, an analyst at brokerage Puente Hnos Sociedad de Bolsa SA in Buenos Aires, in an e-mailed response to questions.

BP is selling assets to pay for cleanup and compensation after the biggest oil spill in U.S. history. The company aims to divest as much as $30 billion in assets by the end of next year to shore up its finances, according to BP’s website.

‘Positive’ Deal

Pan American had 1.54 billion barrels of proven reserves, which may last about 16 years, Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co., said in an interview after the transaction was announced.

“Cnooc’s entrance was definitely read as a positive,” Mariano Kruskevich, an analyst at SBS Sociedad de Bolsa SA, a brokerage in Buenos Aires, said in an e-mailed response to questions. “There is the possibility of greater investments in exploration and production.”

The extra yield investors demand to hold Argentine dollar bonds instead of U.S. Treasuries narrowed 11 basis points to 503 at 5:53 p.m. New York time, according to JPMorgan Chase & Co.

Warrants linked to economic growth rose 0.16 cent to 14.43 cents, according to data compiled by Bloomberg. The peso was little changed at 3.9753 per U.S. dollar.

The cost of protecting Argentine bonds against non-payment for five years with credit-default swaps fell 13 basis points to 618, according to data compiled by CMA. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

No Guarantee?

The disparity in the credit ratings between Cnooc and Pan American doesn’t mean the Latin American company’s debt will be guaranteed by its parent, Gretchen French, an analyst at Moody’s in New York, said in a telephone interview.

“You’re looking at an investment by Cnooc in an asset where they’re putting in quite a bit of equity, so it’s their call if they want to protect that investment,” French said.

Bonds issued by Petrobras, Brazil’s state-controlled oil company, are lagging behind Pan American and Latin American energy companies on plans to increase debt by as much as 60 percent to $107 billion over the next four years to finance the biggest investment plan in the oil industry.

Pemex, as Mexico’s state-owned oil company is known, is underperforming as its debt may rise to a record $56 billion next year to stem output declines. Pemex plans to raise as much as $10 billion next year through bank loans or bond sales in domestic and international markets, Chief Financial Officer Carlos Trevino said Dec. 15 in an interview in Mexico City.

Pan American’s link with Cnooc now makes the oil producer attractive, Lainez said.

“It’s positive for the company to have a Chinese partner in terms of future expansion because it will facilitate a more intense penetration in Asian markets at a time when the region is growing,” said Lainez.

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